Evaluating Vietnam’s changing comparative advantage patterns

ASEAN Economic Bulletin Vol. 27, No. 2 (2010), pp. 221Ð30 ISSN 0217-4472 print / ISSN 1793-2831 electronic DOI: 10.1355/ae27-2e Evaluating Vietnam’s Changing Comparative Advantage Patterns Quoc-Phuong Le This article provides an empirical analysis of Vietnam’s comparative advantage and its changes since the country’s reform programme began in 1986. The framework for analysis is the concept of revealed comparative advantage. The findings indicate that despite a rapid shift in comparative advantage structure from primary products towards labour-intensive manufacturing during 1991Ð96, and a further slow shift towards technology-intensive manufacturing since then, Vietnam’s comparative advantage is still largely based on the country’s endowments of labour and natural resources. So far Vietnam has been able to expand its exports mainly by exploring these favourable conditions. However, exports based on such existing comparative advantage do not deliver significant value-added earnings. It is therefore recommended that relevant policy be implemented to move the economy and its export sector towards a desirable comparative advantage structure by: (1) strengthening food-processing and mining-processing industries to increase value-addedness of exports of primary products; (2) building up strong supporting industries to move the manufacturing sector away from outward processing; (3) encouraging investment in technology-intensive industries; and (4) enhancing human capital and raising the technology capacity of firms. Keywords: Vietnam, comparative advantage, revealed comparative advantage, factor endowments. I. Introduction and multilateral trade and economic schemes such as AFTA, APEC and WTO, signed bilateral trade In more than two decades since its economic reform began in 1986, Vietnam has expanded its agreements with the U.S. and many other nations, export sector enormously. The country has moved and has duly implemented its commitments under from trading largely with a handful of former these treaties. socialist countries of the Soviet bloc in the 1980s This significant progress, in part, can be to dealing with almost 200 economies at present. attributed to the fact that in the process of Export volume has increased from less than international economic integration, Vietnam has US$800 million in 1986 to almost US$63 billion been able to utilize its comparative advantage in 2008 (IMF). Vietnam joined various regional based on factor endowment. To gain further in this ASEAN Economic Bulletin 221 Vol. 27, No. 2, August 2010 © 2010 ISEAS 05 RN_Le Quoc Phuong 221 8/11/10, 12:06 PM process, however, it is important not only to vis-à-vis the rest of the world. RCA>1 reflects the explore the existing comparative advantage, but comparative advantage of the country in good k, also to move the economy and its export sector which exports this good more intensively relative towards a more advanced structure of comparative to the world (as the share of this good in the advantage. country’s exports is larger than the share of the This study aims to provide an empirical analysis same good in world trade). By contrast, RCA<1 of Vietnam’s comparative advantage and its shift indicates the country does not possess comparative over time since the reform programme began. The advantage in this good. research is the expansion of the author’s previous This approach, however has certain study in Quoc-Phuong Le, Nguyen, and Bandara limitations. First, RCA indices may not reflect (1997) and Quoc-Phuong Le (2002). Based on the the true comparative advantage. Since post-trade study’s findings, policy recommendations are data are used to calculate RCA indices, the made on how to shift the country’s comparative results may include many market distortions such advantage towards the desired structure. as tariffs, quotas, export incentives, subsidies, embargoes, labour market distortions and so on, II. Analytical Framework not just natural forces of comparative advantage. Second, RCA indices do not capture the II.1 Revealed Comparative Advantage future comparative advantage because they are Traditional trade theories such as David Ricardo’s calculated based on past trade data (however, theory of comparative advantage and Heckscher- the indices measured over time can show the Ohlin model of factor endowments postulate that trend, along which the pattern of comparative the main basis for international trade is advantage is moving). Further, RCA indices comparative advantage. A country’s comparative appear irrelevant in the case of significant intra- advantage is reflected by its factor endowments industry trade. (labour, capital, natural resources) and technology Despite these shortcomings, RCA indices have level. proven to be a simple but useful analytical tool to Since it is hard to take account of all these examine comparative advantage. factors to measure comparative advantage, Balassa (1965) offers quite a simple alternative approach. II.2 Data On the ground that exports of a country are usually dominated by its comparative advantage This study uses data provided by the International products (thus the country’s pattern of Economics Databank (IEDB) and United Nations comparative advantage is revealed by its export Statistical Division (UNSD) on trade commodity structure), he introduces an index of revealed composition, based on the Standard International comparative advantage of exports RCAik of Trade Classification (SITC). The SITC offers five country i in good k as: levels of commodity aggregation, beginning from 1-digit sections down to 2-digit divisions, 3-digit (/)Xik Xi groups, 4-digit subgroups and 5-digit items. RCAik = (/)Xwk Xw This study uses 1-digit and 3-digit levels for analysis. The 1-digit level, with only ten com- where Xik = i’s exports of k, modity sections, provides an overall picture Xi = i’s total exports; of trade, but it fails to give a detailed analysis. The Xwk = world exports of k, 3-digit level, with 269 commodity groups, can Xw = world total exports. facilitate a reasonably detailed analysis, while The RCA index offers a convenient way to avoiding complexity of 4-digit and 5-digit levels, evaluate comparative advantage of a country which contain thousands of categories. ASEAN Economic Bulletin 222 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 222 8/11/10, 12:06 PM III. Assessing Vietnam’s Shifting Comparative products. These include S0 (Food, live animals); S2 Advantage (Crude material excluding fuel) and S3 (Mineral fuel), which exhibit RCA>1. At the same time, III.1 Patterns of Vietnam’s Comparative Vietnam had no comparative advantage in most of Advantage processed and manufactured commodities. These To analyse Vietnam’s comparative advantage are S1 (Beverage, tobacco), S5 (Chemicals), S6 structure and its shift over time since the (Basic manufactures), S7 (Machines, transport beginning of the reform programme in 1986, three equipment) and S8 (Miscellaneous manufactured representative years are selected as follows: goods), which exhibit RCA<1. In fact, Vietnam’s economy and its exports were (i) 1991 to represent the early stage of economic based largely on agriculture and natural resources. reform; As the industrial sector was under-developed, (ii) 1996 to represent the mid-1990s when exports from this sector were small. Accordingly, Vietnam’s economy has grown rapidly before Vietnam exhibited its comparative advantage it was adversely affected by the Asian mainly in agriculture and natural resources, and financial crisis in 1997Ð98; displayed no comparative advantage in manu- (iii) 2005 to represent the recent period. factured commodities. By 1996 the picture changed quite dramatically. General picture. Vietnam’s RCA index, calculated Vietnam’s comparative advantage base had at 1-digit SITC for 1991, 1996 and 2005, provides expanded to include S8 (Miscellaneous manu- an overall picture of Vietnam’s comparative factured goods). This indicates that over the period advantage structure since the beginning of the 1991–96, the country’s comparative advantage reform programme (Table 1). patterns started shifting towards labour-intensive Table 1 shows that in 1991, Vietnam’s com- products such as clothes and footwear. This parative advantage was based mainly on primary reflects the fact that 1991Ð96 was the period when TABLE 1 Patterns of Vietnam’s Comparative Advantage (At 1-digit SITC) RCA index Commodity at 1-digit SITC 1991 1996 2005 S0-Food, live animals 4.3 3.5 3.6 S1-Beverage, tobacco 0.1 0.1 0.6 S2-Crude material excluding fuel 4.7 1.1 1.1 S3-Mineral fuel 3.4 2.5 2.2 S4-Animals, vegetable oils, fats 0.2 1.6 0.1 S5-Chemicals 0.03 0.1 0.2 S6-Basic manufactures 0.3 0.4 0.5 S7-Machines, transport equipment 0.01 0.1 0.3 S8-Misc manufactured goods 0.8 3.0 2.9 S9-Unclassified goods 0.1 0.1 0.1 SOURCE: Author’s calculations from IEDB and UNSD data. ASEAN Economic Bulletin 223 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 223 8/11/10, 12:06 PM Vietnam’s economy grew quite rapidly. In are dependent on a relatively limited number particular, inflows of FDI capital grew rapidly of comparative advantage commodities. year after year during this period and significantly (iii) The pool of primary products among the contributed to this economic growth. Large parts comparative advantage commodities has of the FDI funds were invested in labour-intensive declined over time while the number of industries which produce garments and footwear manufactured products has consistently for exports. FDI in this industry came mainly from increased. This suggests that the comparative NIEs such as South Korea, Taiwan and Hong advantage structure has shifted from the Kong. At that time, rising labour costs in these primary sector to the manufactured sector. economies forced their companies to shift labour- This trend is analysed further below. intensive production to other developing countries including Vietnam to take advantage of low labour III.2 Changes in Vietnam’s Comparative cost and other investment incentives. Advantage Patterns As a result, labour-intensive products such as Further analysis of Vietnam’s changing com- clothes and footwear have become Vietnam’s major parative advantage structure in 1991Ð2005 (Table exports and its comparative advantage products 3) indicates major trends in Vietnam’s shifting since the mid-1990s. Nevertheless, agricultural and comparative advantage as follows. resource-based sectors still maintained their relative importance in the country’s comparative advantage Gradual expansion of comparative advantage structure, with RCA index for S0, S2 and S4 base. The gradual expansion of Vietnam’s com- remaining greater than 1. parative advantage structure is indicated by the Since 1997, although Vietnam’s comparative growing number of commodity sections with advantage structure continues its shift towards comparative advantage products from five in manufactured goods, the pace of change seems to 1991 to six in 1996 and to nine in 2005 (all be quite slow. As can be seen from Table 1, the sections but S4). This is also evidenced by the structure of Vietnam’s comparative advantage in growing number of comparative advantage 2005 remained largely similar to that of 1996, with groups from thirty-three in 1991 to forty-one in commodity sections that exhibit comparative 1996 and forty-seven in 2005. advantage being S0, S3 and S8. However, while Vietnam’s comparative ad- vantage structure has expanded, it is still chiefly More detailed analysis. The patterns of Vietnam’s based on a limited number of major export items, comparative advantage can be analysed in more which in turn are based on the country’s endowed details at 3-digit SITC (Table 2). Calculated RCA factors (natural resources and labour). indices show the following characteristics. Shift of comparative advantage structure from (i) The number of products with comparative primary products towards manufactures. The shift advantage increases over time, from 33 in away from primary products is indicated by a 1991 to 41 in 1996 and 47 in 2005 (out of the decrease in both absolute number and relative total of 269 commodity groups at 3-digit share of primary comparative advantage groups SITC). Most of comparative advantage from 25 in 1991 (or 76 per cent of total number of products are also Vietnam’s major export comparative products) to 22 (or 47 per cent of items. This confirms Balassa’s proposition total number) in 2005. that a country’s exports are dominated by its At the same time, the shift towards comparative advantage commodities. manufactured products is indicated by the rising (ii) The share of comparative advantage products number and increased relative share of in total exports has been high (around 90 per manufactured comparative advantage products cent). This indicates that Vietnam’s exports from eight (or 24 per cent of total number) in ASEAN Economic Bulletin 224 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 224 8/11/10, 12:06 PM TABLE 2 Vietnam’s Comparative Advantage Products at 3-digit SITC 1991 1996 2005 Commodity groups % EX RCA Commodity groups % EX RCA Commodity groups % EX RCA 025-Eggs 0.7 16.7 025-Eggs 0.3 9.0 022-Milk pr exc buttr/cheese 0.3 1.1 031-Fish fresh, simply presvd 16.5 18.5 031-Fish fresh, simply presvd 8.1 11.1 034-Fish-dried, salted 2.0 5.6 032-Fish etc tinned, prepared 1.0 4.9 032-Fish etc tinned, prepared 0.8 4.6 035-Fish,dried/salted/smoked 0.2 4.4 042-Rice 8.0 64.0 042-Rice 6.1 48.2 036-Crustaceans molluscs etc 5.4 27.1 044-Maize unmilled 0.5 1.8 044-Maize unmilled 0.6 2.4 042-Rice 4.3 41.6 051-Fruit fresh, nuts frsh dry 2.6 4.4 051-Fruit fresh, nuts frsh dry 0.6 1.2 057-Fruit/nuts, fresh/dried 1.9 3.9 055-Vegetables etc prsvd, prepd 0.2 1.2 052-Dried fruit 0.1 1.0 058-Fruit presvd/fruit preps 0.1 1.1 071-Coffee 2.2 8.9 053-Fruit preserved, prepared 0.3 1.1 071-Coffee/coffee substitute 2.3 14.5 074-Tea and mate 0.3 3.5 054-Veg etc frsh, simply prsrvd 0.6 1.4 074-Tea and mate 0.3 8.6 075-Spices 0.6 14.9 055-Vegetables etc prsvd, prepd 0.2 1.9 075-Spices 0.5 17.6 211-Hides, skins undressed 0.8 6.5 071-Coffee 5.8 21.5 122-Tobacco, manufactured 0.4 2.2 221-Oil seeds, nuts, kernels 4.1 13.7 074-Tea and mate 0.3 6.5 223-Oil seeds-not soft oil 0.1 6.1 231-Rubber rude, synthetic 0.5 2.3 075-Spices 1.0 26.0 231-Natural rubber/latex/etc 2.2 21.2 241-Fuel wood and charcoal 0.1 4.3 221-Oil seeds, nuts, kernels 1.1 3.8 232-Rubber synth/waste/etc 0.1 1.2 242-Wood rough 3.1 13.1 231-Rubber rude, synthetic 1.1 4.0 245-Fuel wood/wood charcoal 0.1 3.5 243-Wood shaped 6.0 11.3 241-Fuel wood and charcoal 0.0 4.9 246-Wood chips/waste 0.3 10.3 261-Silk 0.4 28.0 243-Wood shaped 0.5 1.1 261-Silk 0.1 1.3 264-Jute 0.1 23.3 261-Silk 0.1 2.3 264-Jute/bast fibre raw/retd 0.1 3.1 265-Vegetable fibre 0.1 4.5 265-Vegetable fibre 0.1 5.7 265-Veg text fibre ex cot/ju 0.1 5.0 273-Stone, sand and gravel 0.1 1.5 273-Stone, sand and gravel 0.1 1.6 277-Natural abrasives n.e.s 0.1 4.2 282-Iron and steel scrap 0.6 11.8 291-Crude animal matters NES 0.3 4.7 321-Coal non-agglomerated 2.1 4.2 291-Crude animal matters NES 0.9 11.9 292-Crude veg materials NES 0.5 1.6 333-Petrol./bitum. oil, crude 22.7 3.8 292-Crude veg materials NES 1.9 5.3 321-Coal, coke, briquettes 1.7 3.8 592-Starches/glues/etc. 0.3 2.1 321-Coal, coke, briquettes 5.8 9.5 331-Crude petroleum, etc 19.7 4.4 612-Leather manufactures 0.1 1.1 331-Crude petroleum, etc 24.2 4.8 421-Fixed vegetable oil soft 0.2 1.1 621-Materials of rubber 0.2 1.3 632-Wood manufactures NES 0.4 1.5 422-Fixed vegetable oil non-soft 0.5 3.4 635-Wood manufactures n.e.s 0.3 1.2 656-Textile etc products 0.7 3.0 612-Leather etc manufactures 0.3 2.3 651-Textile yarn 0.7 1.7 657-Floor cover tapestry etc 0.3 1.3 631-Venners plywood etc 0.5 1.6 658-Made-up textile articles 0.8 2.5 666-Pottery 0.4 3.1 632-Wood manufactures NES 0.7 2.4 663-Mineral manufactures nes 0.5 2.3 671-Pig iron etc 0.2 1.1 654-Lace ribbons tulle 0.1 1.2 666-Pottery 0.1 1.5 687-Tin 1.0 27.6 656-Textile etc products 1.1 5.1 687-Tin 0.1 1.2 831-Travel goods, handbags 2.3 2.3 657-Floor cover tapestry etc 0.2 1.1 696-Cutlery 0.2 2.9 841-Clothing not fur 2.4 2.4 666-Pottery 0.6 5.9 697-Base metal h’hold equipms 0.2 1.1 686-Zinc 0.3 10.8 716-Rotating electr plant 0.6 1.1 Total 33 groups 88.8 821-Furniture 2.7 2.9 773-Electrical distrib equip 1.6 2.5 831-Travel goods, handbags 2.6 6.4 785-Motorcycles/cycles/etc 0.7 1.9 841-Clothing not fur 17.1 5.6 821-Furniture/stuff furnishg 4.3 4.2 851-Footwear 12.4 18.6 831-Trunks and cases 1.0 4.9 894-Toys sporting goods etc 0.6 1.0 841-Mens/boys wear, woven 4.1 8.2 895-Office supplies NES 0.1 1.0 842-Women/girl clothing wven 3.7 6.0 899-Other manufactured goods 0.6 1.7 843-Men/boy wear knit/croch 1.3 9.5 844-Women/girl wear knit/cro 1.9 7.8 Total 41 groups 90.3 845-Articles of apparel nes 2.9 3.4 846-Clothing accessories 0.2 1.3 848-Headgear/non-text clothg 0.4 1.8 851-Footwear 9.5 15.0 899-Misc manuf articles nes 0.8 1.7 Total 47 groups 90.1 SOURCE: Author’s calculations from IEDB and UNSD data. ASEAN Economic Bulletin 225 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 225 8/11/10, 12:06 PM TABLE 3 Changing Structure of Vietnam’s Comparative Advantage Number of products at Commodity sections (1-digit SITC) 3-digit SITC with RCA>1 1991 1996 2005 S0-Food, live animals 10 13 12 S1-Beverage, tobacco — — 1 S2-Crude material excluding fuel 13 9 7 S3-Mineral fuel 2 2 2 S4-Animals, vegetable oils & fats — 2 — Subtotal primary (S0+S1+S2+S3+S4) 25 (76%) 26 (63%) 22 (47%) S5-Chemicals — — 1 S6-Basic manufactures 6 8 10 S7-Machines, transport equipment — — 3 S8-Misc manufactured goods 2 7 10 Subtotal manufactures (S5+S6+S7+S8) 8 (24%) 15 (37%) 24 (51%) S9-Unclassified goods 0% 0% 2% Total 33 (100%) 41 (100%) 47 (100%) SOURCE: Author’s calculations from IEDB and UNSD data. 1991 to twenty-four (or 51 per cent of total intensive manufactured products (such as number) in 2005. garments, footwear, furniture), then further Although the relative importance of primary towards technology-intensive products (such as products has declined, these products still play a motorbikes, electrical appliances, and electronic significant role in Vietnam’s exports. It is worth consumer goods). Most of these products, noting that a large number of primary however, are outwork-based and outsourced by commodities have been exported as raw materials foreign companies. To complete these products, which are low value-added. Vietnam imports virtually full materials and parts, necessary to produce final products using mainly Further shift towards more sophisticated the country’s cheap labour. This outsourcing-based manufacturing. In 1991Ð96, manufactured com- exports is low value-added, and its benefit to the parative advantage products were seen mainly economy lies largely in providing jobs (mainly in simple manufacturing sections S6 (Basic low-paying). manufactures) and S8 (Miscellaneous manu- factured goods). In 2005, they were seen in more IV. Comparative Analysis of Vietnam and sophisticated manufacturing sections such as S5 Selected ASEAN Countries (Chemicals) and S7 (Machinery and transport equipment). How does Vietnam fare compared to other This indicates that Vietnam’s comparative countries with similar experience? For a com- structure has moved initially towards labour- parative assessment, it is useful to see Vietnam in ASEAN Economic Bulletin 226 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 226 8/11/10, 12:06 PM light of the experience of some ASEAN neighbour industries suffered from low technological and countries such as the Philippines and Malaysia design activities, weak technical support for (see Table 4). firms and inadequate quality of training systems in the country compounded by incompatibility between the industry needs for employment and IV.1 Philippines the school system. A quick look at Table 4 may give an impression Thus, while the Philippines’ major export- that the Philippines is a successful story of oriented manufacturing industries have realized changing comparative advantage structure. Data their comparative advantage in the world markets, in Table 4, indeed shows that the Filipino the country failed to catch up with its comparative advantage patterns have shifted quite technologically progressing Asian neighbours such dramatically, from being based on a combination as Japan, South Korea and Taiwan. The main of various primary sections (S0, S2 and S4) and reason for it is the country’s failure to raise the labour-intensive section (S8) in 1991 to being domestic technological capacity and to base its based on a combination of a primary section (S4) export sector on this firm foundation. and a capital-intensive section (S7) in 2005. However, more in-depth analysis, for example IV.2 Malaysia in Lall (2000) and Abrenica and Tecson (2003), indicates that the Philippines’ capital-intensive Like in the Philippines, Malaysia’s comparative section S7 is primarily dominated by the advantage structure has also changed drama- semiconductor industry, which specializes in tically for the same period. In 1991, Malaysia’s low-end final assembly and testing phase. In comparative advantage structure was quite labour-intensive section S8, the dominating similar to that of Vietnam, based mainly on garment industry — the forerunner in the primary sections (S2, S3 and S4). In 2005, except Philippines’ manufactured exports in the early for S4 still remaining as a strong export section, 1990s — lost its comparative advantage status Malaysia’s comparative advantage structure has mainly because it suffered from poor utilization shifted to the capital-intensive manufacturing of cheap but relatively skilled labour. Both these section S7. TABLE 4 Comparative Advantage Patterns of Vietnam, Malaysia and Philippines Commodity sections RCA 1991 RCA 2005 (1-digit SITC3) Vietnam Malaysia Philippines Vietnam Malaysia Philippines 0-Food & live animals 4.3 0.5 1.8 3.6 0.4 0.7 1-Beverages and tobacco 0.1 0.1 0.8 0.6 0.4 0.6 2-Crude mate excl food/fuel 4.7 2.7 1.5 1.1 0.8 0.5 3-Mineral fuel/lubricants 3.4 1.7 0.3 2.2 1.1 0.2 4-Animal/veg oil/fat/wax 0.2 16.2 8.7 0.1 11.8 4.3 5-Chemicals/products n.e.s 0.03 0.2 0.4 0.1 0.5 0.1 6-Manufactured goods 0.3 0.5 0.6 0.5 0.5 0.3 7-Machiner/transp equip 0.1 1.0 0.8 0.3 1.4 1.9 8-Miscellaneous manufac 0.8 1.1 2.4 2.9 0.7 1.1 SOURCE: Author’s calculations from UN Comtrade database. ASEAN Economic Bulletin 227 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 227 8/11/10, 12:06 PM But unlike the Philippines’ comparative advantage based on the country’s endowments advantage based on the weak technological of labour and natural resources, utilizing the capability and inadequate education system, concentration of FDI in some domestic industries, Malaysia’s comparative advantage is based on a and relying heavily on outward processing more adequate R&D and education system. As a arrangements. result, Malaysia has been able to capture As a result, a number of manufactured products, significant benefits from its export sector. In that both labour-intensive (garment, footwear, furni- sense, although Malaysia and the Philippines ture) and technology-intensive (motorbikes, have followed similar paths in changing their electrical appliances, electronic consumer goods) comparative advantage patterns, Malaysia can be are now specified as Vietnam’s comparative seen as a successful story while the Philippines advantage commodities. However, the production may be assessed as an unsuccessful case. of these products is based mainly on outward The experience of these two ASEAN countries processing, which requires Vietnam to import most in shifting their export structure is valuable to of its materials and parts to make final products Vietnam, each in its own right. Vietnam should using relatively cheap labour. Exports based on learn to avoid the Philippines’ problems and to such principles do not create much value-added. follow Malaysia’s strategies in establishing a sound foundation for the economy and its export sector. V. 2 Policy Recommendations V. How Vietnam’s Comparative Advantage To increase value-addedness of exports, Vietnam Patterns Should Be Changed should not continue speeding up the export growth year on year, as it has done in the past. Instead, V. 1 Factors Influencing Changes in Comparative more relevant policy should be implemented to Advantage Patterns and Vietnam’s Current move the economy and its export sector towards a Situation desirable comparative advantage structure. Based The research body on comparative advantage and on the above analysis, some policy recom- export performance, for example Fugazza (2004), mendations are made as follows. Alvarez (2002), Panagaria (2000), Kojima (1975), highlights not only domestic but also international (a) Strengthening food-processing and mining- factors influencing changes in comparative processing industries to increase value-addedness advantage patterns. Among the domestic factors, of exports of primary products. Primary products perhaps the most important are the country’s including agricultural and fishery commodities factor endowments (labour, capital and natural (such as rice, coffee, tea, seafood, vegetable, resources), technology capacity of domestic firms, rubber, etc.) and mining products (such as crude and the distribution of FDI across domestic oil, coal, and various metal ores) have been among industries. The most significant international Vietnam’s major exports. However, exports of factors include world demand for specific these products mainly as raw and unprocessed commodities, outward processing arrangements, commodities do not bring much value-add, despite and bilateral and regional trading arrangements. the fast-growing export volume. To increase The effect of each factor on export performance value-addedness of the primary sector, Vietnam and changes in comparative advantage patterns needs to move from exports of raw materials to varies from country to country. exports of processed products. As the above analysis indicates, in the past two To realize this move, the government should decades since its economic reform began in the implement measures to develop the food late 1980s, Vietnam has been able to expand its processing and mining processing industries. export sector mainly by exploring comparative Strong food-processing and mining-processing ASEAN Economic Bulletin 228 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 228 8/11/10, 12:06 PM industries will help Vietnam to export processed enterprises (SMEs) play a crucial role in materials instead of raw materials, thus earning supporting industries. considerably higher value-addedness from exports. The relevant policy to build up the supporting industries is, therefore, to provide adequate (b) Building up strong supporting industries to framework and support for SMEs in order to raise help move the manufacturing sector away from their technology capacity and competitiveness. outward processing. Vietnam currently holds considerable comparative advantage in a number (c) Encouraging investment in technology- of manufactured commodities including labour- intensive industries. In order to earn higher intensive (such as garment, footwear, trunks and value-addedness from exports, Vietnam’s com- cases, wooden furniture) and technology-intensive parative advantage structure should be shifted (such as motorbikes, electrical and electronic from primary products and labour-intensive consumer goods) products. The problem is, the manufactures to technology-intensive manufactures. respective industries have to import nearly all To achieve this target, the government should materials or parts to complete goods in the last offer relevant incentives to attract more stage using cheap labour. investment (both domestic and FDI) into building This way of manufacturing (known as outward up technology-intensive industries, such as processing or subcontract processing) might be chemicals and electronics. The development of relevant for Vietnam in the past in terms of these industries should be based on the upgraded providing jobs and expanding export volume. domestic technological capabilities, rather than on However, it does not create much value-added cheap labour. earnings while contributing measurably to the country’s fast rising trade deficit, as the export (d) Enhancing human capital and raise technology sector requires not only large imports of capacity of firms. In recent years, a large number machinery and equipment, but also rising volumes of both domestic and FDI firms in Vietnam have of imported materials and parts. These include capitalized on outward processing using the fabrics and yarns for the garment industry, leather country’s unskilled and cheap labour. This for the footwear industry, semiconductor devices outward processing does not generally require and components for the electronic industry, parts very high levels of technology. The excessive for the car and motorbike industry, and so on. It is reliance on cheap labour and backward technology estimated that for every dollar of exports of to promote exports has prevented Vietnam from manufactured products, Vietnam has to spend moving up the comparative advantage ladder. some US$0.7Ð0.8 on imports of materials and Experience of Asia’s successful economies, parts, which are needed to complete the final such as Japan, the NIEs and some ASEAN products. The main reason for this behaviour countries, shows that quality human capital is is that Vietnam so far has failed to develop pivotal in raising technology levels and com- adequate supporting industries, which could petitiveness of firms, which in turn will eventually provide necessary materials and parts for the lead to favourable changes in comparative manufacturing sector. advantage patterns of the whole economy. To move the manufacturing sector away from Vietnam, therefore, should reform its education its largely outward processing nature, it is and training system to make it capable of necessary to establish strong supporting industries. providing a trained labour force that meets the Experience from more advanced Asian economies needs of firms. The government also needs to (Japan, South Korea and Taiwan) or even from provide incentives and practical support for firms neighbouring ASEAN countries (Malaysia and to raise their technology capacity through R&D Thailand) shows that small and medium-size activities. ASEAN Economic Bulletin 229 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 229 8/11/10, 12:06 PM REFERENCES Abrenica, J.V. and G.R. Tecson. Can the Philippines Ever Catch Up in Competitiveness, FDI and Technological Activity in East Asia. Manila: World Bank. Alvarez, R.E. “Determinants of Firm Export Performance in a Less Developed Country”. Anderson Graduate School of Management, UCLA, 2002. Balassa, B. “Trade Liberalization and Revealed Comparative Advantage”. Manchester School of Economics and Social Studies 33, no. 2 (1965): 99Ð123. Fugazza, M. “Export Performance and its Determinants: Supply and Demand Constraints”. 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IMF (International Monetary Fund), Direction of Trade Statistics Yearbook. Washington D.C.: IMF (various issues). UNSD (United Nations Statistical Division), Comtrade (Trade Commodity Statistics Database). Quoc-Phuong Le is Deputy Director, Department of Macroeconomic Analysis and Forecast (National Centre for Socio-economic Information and Forecast of Vietnam). He is also Visiting Lecturer at the University of Economics and Business (Hanoi National University — Vietnam). ASEAN Economic Bulletin 230 Vol. 27, No. 2, August 2010 05 RN_Le Quoc Phuong 230 8/11/10, 12:06 PM Copyright of ASEAN Economic Bulletin is the property of Institute of Southeast Asian Studies and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.